America's Innovation Crisis

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In June 2009, Michael Mandel raised some alarming questions in a BusinessWeek cover story titled "The Failed Promise of Innovation in the U.S."1  While these issues certainly deserve to be addressed, the Trends editors argue that the tone of Mandel's headline amounts to yelling "Fire!" in a crowded theater in order to get attention. 

To begin with, he correctly observes that much of the breakthrough research launched in the late '90s has made little, if any, commercial impact to date.  However, much of the problem is that expectations were set too high regarding quick commercialization of these breakthroughs.  Gene therapy, stem cells, messenger-RNA interference, hydrogen-powered cars, micromachines, satellite-based Internet broadband, and a host of other technologies were "over-hyped" in terms of the time it would take to bring them to market and in terms of their early-stage economic viability. 

Because of these unreasonable expectations, such technologies drew not only great attention in the late '90s, but enormous investment from venture capitalists.  As Harvard Professor Gary Pisano, author of the book Science Business,2 points out, "It was a much harder road commercially than anyone believed."  That's not surprising when you consider the fact that "breakthrough technologies almost always take longer to commercialize than the pioneers foresee and, later, make a bigger cumulative impact than even their biggest boosters expect." 

As this rule would predict, the reality has been that fewer new inventions are going to market than expected in the past decade and, therefore, they are making a much smaller positive impact on U.S. GDP.  Since U.S. nonfarm exports are largely infotech and biotech products, we've had less to sell abroad.  That's why exports dropped to about 11 percent of GDP while imports skyrocketed. 

That trade imbalance contributed to a borrowing spree, which changed the way growth looked.  During the period from roughly 1998 to 2007, real GDP growth averaged only about 2.3 percent a year.  Mandel, who is the chief economist for BusinessWeek, believes that the failure of major innovations to be commercialized during that period played a role in unleashing the current global recession.3 

One of the corollaries of this interpretation is that as these technologies begin to come to market — as they are now doing — their commercial impact will cause the downturn to reverse itself into a full-scale recovery...

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